Download Why do we have Unemployment?* Prabhat Patnaik

Why do we have Unemployment?*
Prabhat Patnaik
Unemployment has become so persistent a phenomenon in contemporary times that there
is a common feeling that it is a “natural” state of affairs, that nothing can ever be done
about it, and that the only way to have greater employment opportunities coming your way
is either to oppose the system of job “reservations” for the deprived segments of the
population altogether, or to demand that your own “caste” or “community” be included in
the category of those eligible for such “reservations”.
But this view that unemployment is a “natural” state of affairs is based either on ignorance
or on loss of memory, for barely over a couple of decades ago there were societies, a large
swathe of them, headed by the Soviet Union, that were so perennially characterized by
labour shortages, which is the very opposite of unemployment, that tomes used to be
written analyzing the key to their unique and remarkable modus operandi. The most
celebrated economist-critic of the Eastern European socialist system, Janos Kornai, while
analyzing these economies, had actually argued that full employment, or even labour
shortage, was a central feature of these economies. This raises the question: why do we
have unemployment? Just to say that it is because we have a capitalist economy is not
enough; we have to look at the causal links carefully.
There can be two possible proximate reasons why unemployment exists in an economy:
either there is inadequate capital stock to employ everyone willing to work, or there is
inadequate demand in the economy to employ everyone willing to work; in the latter case
unemployment must co-exist with unused capital stock. Within the first reason again we
have to distinguish between two factors: there may be inadequate constant (including fixed)
capital; or there may be inadequate variable capital, i.e. wage-goods, to employ everyone at
the prevailing “customary” level of subsistence.
This first reason, of capital shortage, has never been a decisive one. Even if there may be
occasions when such shortages might have appeared, such as for instance at the top of
some boom (though even that is doubtful), they certainly do not explain the perennial
existence of unemployment. In fact as Michal Kalecki the renowned Polish Marxist
economist had said “the typical condition of a developed capitalist economy” is that the
“resources of the economy are far from being fully utilized”. And this is now the situation
even of economies like ours where, under the neo-liberal regime, unutilized capital stock
and excess stocks of foodgrains (the main wage-good) have become a more or less
permanent feature.
The perennial existence of unemployment together with unused capital stock and unsold
foodgrains in the Indian economy in its contemporary setting must therefore be attributed
to inadequate aggregate demand in the economy. Aggregate demand in turn is made up of
four different components: consumption, investment, government spending and net exports
(i.e. the excess of exports over imports). For a given income distribution, i.e. share of
economic surplus accruing to the propertied classes in total output, consumption demand
itself depends upon the level of employment and output, i.e. upon the level of aggregate
demand. Hence if consumption demand is to be increased, then (barring transient measures
like greater consumption credit) income distribution must be altered in an egalitarian
manner, i.e. through an increase in the share of the working people in total output, which
capitalists would obviously resist.
Likewise, investment generally depends upon the expected growth of the market. Of course
these expectations are sometimes euphoric and sometimes not so, but they can scarcely be
“made to order”. And the view that a lowering of the interest rate brings about significant
1
increases in investment is not borne out by facts; investment in fact is quite insensitive to
the interest rate.
Government expenditure was considered the main autonomous tool through which
aggregate demand, and with it output and employment, could be increased. John Maynard
Keynes who had been worried that high levels of unemployment would push capitalism to
its doom, and therefore had advocated “demand management” by the State to keep
capitalist economies close to full employment as a means of saving the system, had pinned
his hopes on this instrument. But under neo-liberalism, when governments are expected to
show “fiscal responsibility”, i.e. tailor their expenditure to their revenue and run only a small
fiscal deficit that is acceptable to globalized finance, this instrument ceases to matter. If
output is low, then government revenue is low (and raising larger revenue through taxes on
the rich is eschewed under neo-liberalism), and hence government expenditure too is low,
which means that output cannot be increased through this instrument. It is no longer an
autonomous instrument through which the State can intervene to raise aggregate demand.
Finally, net exports depend upon the state of the world economy: when the world economy
is booming, individual economies can export more and hence there will be more
employment and output in each of them. But since the world economy itself consists only of
the individual economies, it can boom only if some individual economy, notably a large
economy like the U.S., starts booming. It follows therefore that in a neo-liberal setting, the
level of aggregate demand and hence employment in each economy depends upon whether
euphoric expectations get generated in a large economy like the U.S., i.e. whether the U.S.
has a “bubble” or not. The “dotcom bubble” in the U.S. in the nineties, and the “housing
bubble” in the U.S. in the early years of the current century, were largely responsible for the
growth of the world economy over that period and hence ultimately underlay whatever
employment generation occurred within the neo-liberal regime in our own country. Those
“bubbles” are now over, and there are no prospects of any other “bubbles” emerging in the
immediate foreseeable future. The world economy therefore will continue to be mired in
crisis; and unemployment in our own economy, which was increasing (though not in an open
form) even during the years of high growth, will increase sharply in the coming years.
The conclusion that would follow from the analysis at this level is no doubt illuminating; but
it is still insufficient. This conclusion can be stated as follows: if we could detach our
economy from the global economy, through imposing controls over capital flows into and
out of our economy, as we used to have in the days before neo-liberalism, and thereby
make the State’s fiscal policy independent of the whims and caprices of globalized finance
capital, then “demand management” as in the old days could be resumed; aggregate
demand could be boosted, and hence employment could increase.
This is certainly true and important. It also constitutes a proximate solution to the crisis of
unemployment. But even if this could happen, unemployment would still not be eliminated.
This is because a reduction in unemployment, or more accurately in the magnitude of labour
reserves (since unemployment does not exist only in an open form), would strengthen the
bargaining position of the workers, who would demand higher money wages. If these wage
demands are conceded but prices are raised as a result of such money wage increases, then
there would be a cost-push inflationary spiral, with money wages and prices chasing one
another; this would destabilize the value of money under capitalism. And if these wage
demands are conceded and prices not raised as a result of such wage increases, then the
share of profits would fall, which the capitalists would certainly not like. It is important for
the stability of the system therefore that the relative magnitude of labour reserves must not
fall below a certain level. This amounts to saying that the size of the “reserve army of
labour” relative to the active (or the total) army has a floor below which it cannot fall.
If unemployment has to be eliminated, i.e. if the size of the reserve army is to fall below this
floor, then pricing of products cannot be left to capitalist enterprises (for that as we have
2
seen would cause a wage-price spiral). There must then be State intervention in the form of
an “incomes and prices policy”. The State in such an economy must then not only carry out
“demand management”; it must also engage in “distribution management”. When after
years of pursuing Keynesian policies of “demand management”, capitalist economies did
start experiencing serious cost-price spirals, many governments did try for a while to
introduce “incomes and prices policies”, so that the high employment levels could be
maintained while inflation could be controlled. But these efforts proved futile.
The reason why they proved futile is because capitalists are opposed to any such extensive
State intervention in the economy which is not mediated through them, i.e. which does not
provide them with “incentives” for improving the state of the economy but attempts to do
so directly. This undermines the social legitimacy of capitalism: if the State is so badly
needed for increasing employment, people begin to ask, then why doesn’t the State take
over the running of the economy itself from the capitalists? It is essential for the social
legitimacy of the system that capitalists must be seen as indispensible; and to preserve that
myth, State intervention must be mediated through them by improving their “incentives”,
boosting their “animal spirits” and “euphoria”; and so on.
Coming back to the question, why we have unemployment, it follows therefore that under
neo-liberal capitalism, where the level of activity requires “bubbles” to sustain itself, the
paucity of aggregate demand as a general feature constitutes the obvious explanation. But
even in an economy where the State recaptures its ability to boost aggregate demand by
pursuing whatever fiscal policy it wishes to, by way of taxation and fiscal deficit, the
maintenance of a high level of employment requires increasing intervention by the State,
from “demand management” to an “incomes and Prices policy”, and so on, which
undermines the social legitimacy of the capitalist system and which therefore is impossible
to sustain within the confines of the capitalist system.
To say this does not mean that we should not demand higher employment under the
existing system or that we cannot even achieve through our struggles higher employment
under the existing system. What it means in fact is just the opposite, namely that a
persistent struggle for employment within the system is a way of transcending the system
itself; and this constitutes an all-powerful reason for our engaging in this struggle.
* This article was originally published in the People’s Democracy, vol. XL, no. 11, March 13, 2016.
3